The Case for Cheap Eats

In the hands of the quick-service restaurant operator, price might be the ultimate weapon, the key ingredient to swing a customer and prompt a purchase in today’s dollar-conscious market.

And the quick-service industry knows it all too well, an awareness that has sparked a decades-long raging debate about what cheap food—a term used here to describe price rather than a judgment on food quality—does for a restaurant brand, its operators, and the consumer.

In 1988, Taco Bell, then under the control of PepsiCo, launched its 59-cent Value Menu, a national quick-service chain’s first foray into cheap eats. Within two years, Taco Bell witnessed a 50 percent sales increase and traveled further into the discounting space with a three-tier pricing structure for its value items.

As envious of Taco Bell’s gains as they were inspired to craft a competitive response, quick-service behemoths such as McDonald’s and Burger King responded in 1990 with value offerings of their own, optimistic that the incremental volume would offset the lower menu prices. Fast-forward two decades, and value deals line the menus of many major quick serves, including Wendy’s and Subway, which rocked the industry last spring with the announcement that its limited-time $5 Footlong promotion would be a regular fixture on the chain’s menu.

As restaurants push value in a quest for market share, a reality that only intensified during the recession, the price wars have emerged as a fact of life—and one unlikely to disappear. So long as one competitive rival offers cheap food, others are compelled to follow suit lest they risk declining traffic and volume.

“If we could wave a magic wand and all brands would stop [offering value items] at the same time, then operators would be happy with the level playing field. But that’s not happening,” says Dennis Lombardi, executive vice president of foodservice strategies with Columbus, Ohio–based WD Partners. “For now, we’re looking at a competitive positioning that brands have to match.

“I wouldn’t want to be the lone ranger out there to drop the value proposition and raise prices because the consumer is still price-focused,” he says.

While some have used price-cutting as a tactic and others have overhauled operations to make lower prices a permanent strategy, the cheap food debate remains, forcing all segments of the industry to question the validity and benefit of low-priced options.

The Case for Cheap Eats

Since Taco Bell opened the cheap-food floodgates in 1988, many quick-service brands have continued to champion the need for value-priced options, particularly as like-minded rivals tout their offerings.

Besides volume and transactions, the argument arriving from many corporate offices cites increased traffic and sales potential. While some customers might enter with the intent to purchase two $1 sandwiches, they are likely to purchase additional items. Moreover, value menus can drive consumer behavior and maintain consumer awareness.

“The idea being that if brands can stay in my mental phonebook, then I’ll consider them for other dining options as well,” Lombardi says. “By bringing me back with value, they’re holding their relevance.”

Value items have historically been viewed as a means of driving traffic, appealing to new audiences, and building up average check size. During the recession, however, value menus began to serve a slightly different purpose, as some customers traded down from signature items or ordered a number of cheaper items from the value menu for their dining visit.

The mere presence of such low-priced offerings, many analysts argue, has created a consumer trained to expect cheap food. As a result, the value menus become self-perpetuating, says Leslie Kerr, a pricing consultant and founder of Boston-based Intellaprice.

To be certain, consumers relish the price wars, which started with the lunch crowd but have filtered down to breakfast as well. In addition to offering a value-conscious price point, many others find the affordable offerings to be a slimmed-down version of a more traditional item—the Whopper Jr. instead of the Whopper or the McChicken rather than the more indulgent Grilled Chicken Ranch BLT sandwich at McDonald’s.

For restaurant brands and operators, however, the solution is not so clear.

As early as 1991, franchisees at McDonald’s and Burger King claimed that the aggressive discounting had impacted profit. It’s a charge still resonating today.

In November 2009, Burger King’s franchisee association filed suit against the Miami-based burger brand, contending that the $1 double cheeseburger was causing franchisees to lose an average of 10–15 cents per sandwich. The lawsuit was settled last April with franchisees receiving more input on value menu pricing.

Yet many analysts say operators inject fixed costs such as labor and overhead into the equation to highlight the value offering’s loss. However, those fixed costs remain steady regardless of menu prices, while food costs for well-designed value offerings do not—and should never—approach 100 percent.

“Simply put, a properly designed value item does not lose money for the operator,” Lombardi says. “Operators might not make the same percentage margin, but they’re not losing profit.”